January 10th, 2018
Effect of increased market costs on margin, turnover and ROI
Increased market efforts will result into increased costs that will increase the expenses to be charged to the revenues that the entity will generate. Since the increased marketing activities such as advertising are aimed at safeguarding against price reduction, the success of the campaign would only be realized if more volumes can be sold at these high prices to compensate for increase in expenses used in generating sales. The increase in sales volumes at the current price level may prove challenging as the manager contends (in question 1) that even with the price reduction doubling the sales volumes is hard. In case the sales volumes will remain constant, then the additional marketing costs will reduce the net profits for the company hence lead to a decline in the profit margin.
Increased marketing costs out of the aggressive campaigns the manager intends to embark on would increase the assets turnover where the sales volumes remain constant. Such would arise out of the utilization of some of the assets such as cash and its equivalents in the marketing activities. This reduces the average total assets hence the revenue to average total assets ratio (turnover) will increase. The planned marketing activities effect on ROI will be determined by their effects on both the margin and the turnover. Since ROI is a product of the margin and turnover, a higher percentage decline in the profit margin than that in the average total assets will lead to a decline in ROI. Conversely a higher percentage decline on the total assets, as a result of the marketing activities, than on the profit margin would increase ROI.